The final answers are shown, please show all steps. 3. Alfred Home Construction

Question

The final answers are shown, please show all steps.

3. Alfred Home Construction is considering the purchase of five dumpsters and a transport truck to store and transfer construction debris from building sites. The entire rig is estimated to have an initial cost of $125,000, a life of 8 years, a $5000 salvage value, an operating cost of S40 per day, and an annual maintenance cost of $2000. Alternatively, Alfred can obtain the same services from the city as needed at each construction site for an initial delivery cost of $125 per dumpster per site and a daily charge of $20 per day per dumpster. An estimated 45 construction sites will need debris storage throughout the average year. The minimum attractive rate of return is 12% per year. (a) How many days per year must the equipment be required to just break even? (b) If the expected usage is 75 days per year, which option-buy or lease-should be selected based on this economic analysis? Determine the expected annual cost of this decision. [Ans. (a) 24.6 days per year; (b) $-29,756]

Explanation / Answer

Let X= Breakdown days per year

125000(A/P,12%,8)+ 5000(A/F,12%,8)+2000+40X=45(125+20X)

25162.85-406.50+40X+2000=26756+40X

Accordingly,

26756+40X=5625+100X

or X=352

b) if expected use is 75 days., Then the cost associated with lease would be 5625+(100*75)=$13125

It is very clear that lease is profitable EVAC for lease is lesser then buy

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